Capital gains and your home sale

You also must live in that principal residence for two of the five years before you sell it. This is known as the use test. It also means, practically speaking, each sale must be at least two years apart.

That still leaves you room to make some money on several properties. You can sell your residence this year, pocket any gain within the tax limits and buy a new residence. Two years later, you can do the same thing, again and again, every two years.

And you no longer have to worry about that pesky prior-law reporting requirement. When your gain doesn't exceed the limit, you don't have to file anything with the IRS.

Second home sales take a tax hit

Owners of multiple homes, however, will now find it's not as easy to shelter sale profit as it used to be.

A provision of the Housing Assistance Act of 2008, the bill designed primarily to provide relief to some homeowners facing foreclosure, could cost the owners of a vacation or other type of second property -- when they sell.

Previously, you could move into the second property, make it your primary residence, live there for two years and then sell it and pocket most or all of the profit.

Now, however, even if you convert a second piece of real estate to your primary home, you'll owe tax on part of the sale money based on how long the house was used as a second, rather than your main, residence.

Special rules for married couples

While a husband and wife get double the exclusion of single home sellers, couples also have some additional considerations when it comes to determining whether their sale is tax-free.

Either spouse can meet the ownership test. For example, the IRS says it's OK if you owned the home for the past two years, but you just added your new husband to the title when you got married six months ago. Since you owned the residence for the requisite time, as joint filers, you have no problem meeting the ownership test even though your husband wasn't an official owner for that long.


Show Bankrate's community sharing policy
          Connect with us

Connect with us